Declaration of Trust

A Declaration of Trust is a legal document that is drawn up when people buy property together and they wish to reflect the legal arrangements under which they will own, fund and sell property, and, most specifically, how the sale proceeds would be divided.

It is also frequently used to confirm the extent of each person’s equitable or beneficial interests in a property, meaning a person’s share in a property that may not be reflected in the legal ownership of the same. It is a document that should be tailored to each parties’ needs and desires and therefore, needs to be carefully constructed to cover all relevant points.

A Declaration of Trust can be used in a number of circumstances, for example:

• When people who are unmarried buy a property together; it can be used to clearly set out their respective contributions so that in the event of the relationship ending or the property being sold for some other reason their entitlement to a share of the equity (value of the property less the mortgage debt) is defined.
• When parents contribute towards their child’s home and wish to reflect and protect their contributions and set out in what circumstances they would be repaid.
• When a person’s name is not on the property register (also known as the legal title) or if they are not a party to the mortgage. For example, where they have poor credit rating or where they move into a home that is already owned by the other party, but they still make financial contributions towards the property.

A Declaration of Trust is particularly key in the context of unmarried couples where the relationship is not recognised in law. The term “common law spouse” is a myth, as unmarried couples do not acquire the same legal rights as a married spouse overtime regardless of the duration of their relationship or a result of having children together.

There can be circumstances in which one person in an unmarried couple contributes significantly more than the other to purchase a property. In these circumstances, on the breakdown of the relationship, couples can be forced into a minefield of legal issues leading to complex litigation should one party wish to address their ownership of the property.

A Declaration of Trust can circumvent these issues by providing a clear structure for the division of the sale proceeds (known as the equity) at the outset and can ensure that unequal contributions are protected in the event of a sale of the property as well as enabling the couple to agree on how non-financial contributions being recognised and accounted for.

Furthermore, a Declaration of Trust can be used to avoid disagreements as to how much each owner will pay towards the costs associated with the property, what will happen if one person wants to sell their share of the property and how any mortgage on the property will be paid off.

Making a Declaration of Trust requires each party to be clear about their expectations in co-owning a property and the arrangements for running the property. This may be a difficult conversation in the first instance, but it will avoid uncertainty and disagreements in the future, especially in the event of a breakdown of a relationship. Further, as the agreement is already set out, it can prevent the need to attend at court to decide upon the financial consequences arising out of parties’ ownership of the property which will save time, costs and stress.

All Declarations of Trust will be different with varying terms, depending on the parties needs and wants. However, the following should be contained in all Declarations of Trust:

• The amount each party has contributed to the deposit for the purchase of the property;
• The amount contributed to the initial acquisition price;
• The amount each party will contribute to the mortgage repayments and other outgoings;
• The percentage of the property each party will own;
• The change in percentages if one party contributes more towards major changes, such as refurbishments;
• What percentage each party will receive from the sale of the property;
• How the property will be valued before any sale;
• The process if one party wanted to realise their share when the other didn’t; and
• When the property should be sold and in what circumstances.

A Declaration of Trust is usually created at the point of purchase of a property, but it is possible to create one at a later stage, for example when parties are already cohabitating and wish to define their equitable shares in a property or financial arrangements for the future.

A Declaration of Trust is a legally binding document addressing the legal and the equitable ownership of a property. All parties to the agreement will also need to demonstrate they had a full understanding of the agreement and enter into it of their own free will and the document must be signed by all parties and witnessed.